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Internet Bank founder gets 10 years after ratting on partner

The co-founder of what prosecutors called a black-market bank for con artists, hackers and child pornographers was sentenced to 10 years in prison after getting a break for helping the government prosecute his former partner.

Prosecutors urged a judge to sentence Vladimir Kats to less than the 27-plus years he faced under non-binding federal sentencing guidelines because of his cooperation. That help included giving agents the password to encrypted child pornography on his hard drive. His ex-partner Arthur Budovsky was sentenced to 20 years last week.

Kats, 44, of Brooklyn, New York, has a history of fraud dating to 1999, according to prosecutors. He and Budovsky founded Liberty Reserve SA, a digital-currency money business that criminals used to hide illegal transactions totaling more than $6 billion, the government said.

U.S. District Judge Denise Cote said at Kats’s sentencing in Manhattan that she needed to balance his “extraordinarily important” cooperation with the government’s prosecution of Budovsky against the criminal activity that he had made his life’s work.

Digital Currency

Before it was shut down, Costa Rica-based Liberty Reserve was one of the world’s most popular digital currency services. The government claimed about 1 million people around the world used it to conduct 55 million transactions, almost all of them illegal. Criminal rings in Vietnam, Nigeria, Hong Kong, China and the U.S. were found to have moved money through the service, according to the U.S.

Users could set up accounts with Liberty Reserve using fake names such as “Russia Hackers” and “Hacker Account,” prosecutors said. An undercover agent established an account using the name “Joe Bogus” and claiming an address of “123 Fake Main Street, Completely Made Up City, New York.”

Kats told Cote he felt “disgust, humiliation and embarrassment” over his actions. His lawyer, Christopher Flood, asked the judge to sentence him to no more than the three years he’s already served since his 2013 arrest.

Kats, born in St. Petersburg, Russia, holds an accounting degree and attended Brooklyn Law School. Flood told Cote his client’s possession of child pornography was tied to abuse earlier in life.

Camp Counselors

Kats and Budovsky became friends when they were teenagers, working as camp counselors in Brooklyn. The two laundered money before starting Liberty Reserve in 2005, according to prosecutors. Budovsky pushed Kats out in 2008.

In addition to the prison sentence, Kats was ordered to serve five years probation and forfeit $6.5 million.

Also on Friday, Cote sentenced Azzedine El Amine, who pleaded guilty in 2014 to conspiracy for his role as Kats’s and Budovsky’s deputy, to the time he’s already served. The judge ordered him released from custody. El Amine also cooperated with the government.

The case is U.S. v. Kats, 13-cr-00368, U.S. District Court, Southern District of New York (Manhattan).

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